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Highlights
- Significant debt levels for Ampol Limited (ALD) raise concerns.
- Weak interest coverage indicates high leverage.
- Focus on future earnings and free cash flow for better financial health.
Ampol Limited (ASX:ALD), a prominent ASX energy stock, has been in the spotlight due to its financial strategies and use of debt. Li Lu, an influential fund manager supported by Berkshire Hathaway's Charlie Munger, famously warns that the greatest investment risk is not price volatility, but the potential for a permanent loss of capital. This perspective is particularly relevant when assessing Ampol's financial health, especially its debt.
As of December 2024, Ampol held AU$2.89 billion in debt, a rise from AU$2.50 billion in the previous year. With cash reserves of AU$123.9 million, the net debt stood at AU$2.77 billion. Such a balance sheet requires careful monitoring, especially since the company's liabilities surpass its cash and receivables by AU$6.94 billion.
The debt to EBITDA ratio for Ampol is at 3.4, indicating a significant reliance on borrowing. Moreover, an interest cover of 1.6 suggests that the company's earnings, before interest and tax, are only marginally higher than its interest expenses. Such figures highlight the potential impact on shareholder returns due to costly borrowing.
Adding to the concerns, Ampol's EBIT saw a decline of 49% over the past year. Sustaining such trends could present challenges in addressing debt obligations. However, the generation of free cash flow, amounting to 60% of its EBIT over the last three years, offers some reassurance, making it easier for Ampol to address its financial commitments when necessary.
Looking ahead, Ampol's future earnings will play a crucial role in maintaining a healthy balance sheet. It’s essential for shareholders to continuously monitor the company's liquidity and overall financial health. For those seeking investments with lower debt risks, exploring companies with a track record of profit growth might be beneficial.
Tracking Future Prospects
Ampol's transition from EBIT to free cash flow is a positive indicator, suggesting potential capabilities in debt management. Despite current concerns, the conversion rate provides some room for optimism regarding the company's future.
There are notable risks tied to Ampol's debt levels, prudent monitoring of its financial developments, especially in terms of earnings and cash flow, may yield better insights into its long-term viability.
